S & P - Sideways Is The Current Choice. A Disharmony In Price And Volume.

Mar. 6, 2011 10:12 PM ET

Sunday Evening 6 March 2011

Technical Analysis 101 says volume goes with the trend. It expands in an up market, reflecting more buying interest, and volume tends to diminish on corrections when buyers retract and sellers are not there in large enough numbers to upset the direction. Conversely, when a market goes down, volumeincreases on declines and lessens on rallies. In Technical Analysis 202, it is known that smart money buys low and sells high. In other words, smart money accumulates positions at/near bottoms, marks up price and then distributes, or sells at highs. One thing is certain: smart money DOES NOT buy tops.

In viewing the daily chart, there is no question that the highest volume since the July 2010 lows has occurred at the current highs. There is a disharmony between volume, [effort] and price, [results], of late. The three high volume days at the end of February did not result in any downside follow-through. Nor has the high volume in March. It is also obvious that when price rallies, it does so on less volume.

There has been little to no payoff for the high volume sellers, and the low volume buyers are struggling. Right now, price is in the middle of a developing trading range. This recalls a little expression in trading, "buy the dumps, sell the humps, but don't diddle in the middle." There is actually sound reason for taking the latter to heart. In the middle, the level of knowledge is at its lowest. Price can go either way, up to the top of the range, down to the bottom, without making any difference, so there is simply no edge to buy or sell in the middle of a trading range. This is where price currently resides.

What to make of the disharmony? There is likely distribution going on. Smart money is using the higher price level to unload, hence the increase in volume on declines. It takes time to distribute, so a trading range develops as longs are liquidated and new short positions are acquired.

Right or wrong, this is how we see it, and we also see no reason to "diddle in the middle." As a follow-up, we had been short from1323.50, covering half the position at 1303, same day. The remaining balance was covered next day at 1317.75 when price rallied instead of declining.